RBC Upgrades NetApp, Says CEO Change Could Be 'Catalyst To Unlock Value'

In a report published Wednesday, RBC Capital analyst Amit Daryanani upgraded the rating on NetApp Inc. (NASDAQ: NTAP) from Sector Perform to Outperform, while raising the price target from $35 to $38. The analyst believes that the recent change in CEO could prove to be a catalyst for the stock.

Following the change in CEO, the analyst expects the company's board to explore all possible options to drive up the stock valuation, such as margin expansion, going private, sustaining its current path and looking at strategic buyers.

"Fundamentally, we think NTAP can't sustain 63% gross-margins and 47% OPEX when revenues are declining. Adjusting OPEX to the revenue reality could unlock EPS and FCF upside. We think what course the board takes should be clear by end of 2015," Daryanani said.

In case the company opts to focus on margin expansion and free cash flow return, it will need to lower its growth targets. The analyst believes that even if there is a 5 percent decline in revenue, NetApp would be able to sustain annual free cash flow of over $1 billion, via cost savings and lower opex.

In the event that NetApp chooses to look for strategic buyers, the company would need to focus on buyers who "could take out material amount of costs and make NTAP acquisition very accretive," the RBC Capital report stated.

The analyst believes that Oracle Corporation (NYSE: ORCL) could attain meaningful synergies from the deal, while a merger with EMC Corporation (NYSE: EMC) could lead to attractive accretive, although there could be some regulatory hurdles.

While choosing to go private could also be a viable option, the analyst expects NetApp to face difficulties in sustaining its Debt/EBITDA leverage, given that the industry is currently in a transition phase.

"However, if Cloud ONTAP is a viable offering that can be significantly expanded we could see in a bull case – NTAP going private at a hardware multiple (5-7x FCF) and come public as a Software defined storage play (at 6-8x Sales)," Daryanani explained.